The U.S. Court of Appeals for the Third Circuit, applying California and Virginia law, has found that wrongful acts alleged in two ERISA class actions comprising different class periods are causally and logically related. Northrop Grumman Corp. v. AXIS Reinsurance Co., 2020 WL 1933264 (3rd Cir. Apr. 22, 2020).
In 2006, participants in two employee retirement plans filed a class action (the “2006 action”) against the insured for breach of fiduciary duty in connection with the administration of the plans. The 2006 action alleged that the insured: (1) overpaid itself for plan-administrative services rather than bidding those services out to a third party; (2) allowed third parties to bill at above-market rates when it outsourced plan-management functions; and (3) selected certain investment managers because those managers gave preferential discounts on other plans.
Several years after filing the 2006 action, plaintiffs purportedly discovered additional wrongdoing by the insured. The underlying court concluded, however, that the 2006 action did not extend to misconduct that occurred after May 2009. In response, a second class action (the “2016 action”) was filed, encompassing one of the plans at issue in the 2006 action and alleging wrongdoing occurring after the 2006 class period ended. The 2016 action alleged that the insured: (1) overpaid itself by internally managing administrative services rather than bidding them out to more cost-efficient third parties; (2) mismanaged a fund by using an “active” manager even though cheaper and better-performing “passive” managers were available; and (3) overpaid a third party for recordkeeping services.
The insured, which maintained towers of insurance coverage during all relevant years, tendered the 2016 action to its 2016 primary insurer. The insurer denied coverage on the grounds that the two actions alleged related wrongful acts, triggering the policy’s prior notice and relation-back clause. The operative insurer in the 2006 insurance tower, however, also denied coverage, asserting that the two actions were not related. The insured filed a lawsuit against both insurers. The district court concluded that the two actions alleged related wrongful acts and thus the operative insurer in the 2006 tower had a duty to defend the insured.
The court of appeals affirmed. The court held that under California and Virginia law, the term “related” is construed broadly, “embracing both causal and logical relationships.” The court concluded that the allegations in both actions regarding administrative service fees were “nearly identical,” both actions alleged that the insured “made poor fund-management decisions that led to increased fees and hampered fund performance,” and the record-keeping fee allegations in the 2016 action and the excessive-fees claim in the 2006 action “concern the same kind of wrongdoing: a failure to monitor and limit third-party fees prudently.” Furthermore, “the classes overlap in the plans to which they belonged” as the 2016 class members “were participants in one of the two retirement plans at issue” in the 2006 action. In addition, the court concluded that while the class periods differed, given that the plans at issue were defined-benefit plans, there likely was overlap between members of the two classes.